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Edited Transcript of GTLS earnings conference call or presentation 18-Jul-19 1:30pm GMT

Q2 2019 Chart Industries Inc Earnings Call

GARFIELD HEIGHTS Jul 22, 2019 (Thomson StreetEvents) -- Edited Transcript of Chart Industries Inc earnings conference call or presentation Thursday, July 18, 2019 at 1:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Jeffrey R. Lass

Chart Industries, Inc. - VP, CFO , Treasurer & CAO

* Jillian C. Evanko

Chart Industries, Inc. - CEO, President & Director

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Conference Call Participants

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* Craig Kenneth Shere

Tuohy Brothers Investment Research, Inc. - Director of Research

* Eric Andrew Stine

Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst

* James Carlyle West

Evercore ISI Institutional Equities, Research Division - Senior MD

* John S. Sturges

Oppenheimer & Co. Inc. - Director of Investments

* Martin Whittier Malloy

Johnson Rice & Company, L.L.C., Research Division - Director of Research

* Pavel S. Molchanov

Raymond James & Associates, Inc., Research Division - Energy Analyst

* Robert Duncan Brown

Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst

* Thomas Lloyd Hayes

Northcoast Research Partners, LLC - MD & Senior Research Analyst

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Presentation

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Operator [1]

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Good morning, and welcome to the Chart Industries Inc. 2019 Second Quarter Conference Call. (Operator Instructions) The company's supplemental presentation was issued earlier this morning. If you've not received the release, you may access it by visiting Chart's website at www.chartindustries.com. A telephone replay of today's broadcast will be available following the conclusion of the call until Thursday, July 25, 2019.

The replay information is contained in the company's press release. Before we begin, the company would like to remind you that statements made during this call that are not historical in fact are forward-looking statements. Please refer to the information regarding forward-looking statements and Risk Factors included in the company's earnings release and latest filings with SEC. The company undertakes no obligation to update publicly or revise any forward-looking statement. I would now like to turn the conference call over to Jill Evanko, Chart Industries' CEO.

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Jillian C. Evanko, Chart Industries, Inc. - CEO, President & Director [2]

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Thank you, Daniel. Good morning, everyone, and thank you for joining us today to go through our second quarter 2019 results and full year outlook.

As usual, we will walk through our supplemental presentation that was released this morning starting on Slide 2. Thematically, we are seeing significant demand for LNG, not just for big LNG but also for the global infrastructure build-out. This is a unique opportunity for us as our Distribution & Storage and Energy & Chemicals products serve various global applications ranging from small and utility-scale LNG facilities to big LNG export terminals to fueling stations to regasification plants.

The scaling of this infrastructure build is happening quickly, in particular, as the number of countries importing LNG is rising, currently at 42 countries, including Panama, Gibraltar and Bangladesh, the 3 newest additions in 2018.

What is important about the increasing number of countries importing LNG is that all of these countries, regardless of size, will need infrastructure to utilize the gas. The need for alternative energy in conjunction with ramping regulatory requirements, such as IMO 2020, are driving decisions toward natural gas.

Also unique to us is our access to global geographic and specialty growth markets. The additions of VRV and Air-X-Changers, which closed on July 1st, broadened our product offering across the gas-to-liquid cycle as well as access to regions, such as India, with localized manufacturing abilities. You'll hear more today about how we will leverage our footprint, increase international opportunities, inclusive of taking air-cooled heat exchangers outside of the United States.

We will conclude today's call with the reiteration of our prior full year 2019 guidance, inclusive of the impacts from our recent strategic financing and the addition of Air-X-Changers. We're able to reiterate our guidance because of the strength in backlog, with all 3 segments backlog increasing sequentially over the first quarter and our self-help margin expansion actions benefiting gross margin and SG&A.

Moving to Slide 3. While the second quarter 2019 orders faced tough comps to both Q1 2019 and Q2 2018, order activity continues to be robust. Orders of $322 million grew 1.8% over the second quarter of 2018, which included 3 large orders totaling $53 million. In the second quarter of 2019, we received 15 orders that each were greater than $2 million in value, totaling $80.2 million, the first time in our history with 15 orders of this magnitude in a single quarter.

This trend supports the strength across our markets and demonstrates broad-based growth. Also in the second quarter, we received our largest order for fans in the history of the business for a refinery project in the U.S. Virgin Islands. Already in July, we have received a $9 million order for a hydrogen recovery system in an ammonia plant located in Saudi Arabia. The past 6 quarters of order strength supports continued sales growth with second quarter 2019 revenue of $310 million is 7% increase over the first quarter as well the 5% organic increase over the second quarter of 2018.

Before we dig into the status on big LNG projects, I will spend some time on Slide 4, which show the depiction of global small and utility-scale LNG opportunities. We have shared that we have booked over $20 million of utility-scale related LNG orders in the past 8 months, yet we have not explained in-depth the magnitude of the opportunity for our equipment and process in this space.

By way of background, small-scale LNG is not new, yet is only recently been recognized as part of the global LNG infrastructure build-out. Small-scale LNG serves a different set of customers than mid or baseload LNG export terminal operators serve, and in the case of the United States, do not require FERC approval. The smaller liquefaction plants typically have a production capacity of less than 500,000 tons per year and serve specific uses such as marine bunkering, fuel for over-the-road transport and power generation in targeted locations.

Utility clients are moving towards LNG as an option for a peak capacity market demand solution in gas pipeline-constrained areas. A good example of where this solution could be useful is in New York City, where 72,000 people were without electricity for over 5 hours last Saturday. And utility companies are indicating that outages across their networks could occur this coming weekend due to high temperatures and excessive stress on the grid.

We've executed an agreement with utility-scale focused EPC ODIN to work together to develop a utility-scale market in the Northeastern United States. The Northeast United States is noteworthy as there're multiple projects moving ahead in the short term. In addition to the 3 recent orders we received, Philadelphia Gas Works received City Council approval on June 13 to move their Passyunk LNG plant ahead, which ODIN and Chart will develop and construct together. Additionally, in Massachusetts, the Northeast Energy Center project continues to progress through the necessary steps to begin construction.

This project, which we're also working with ODIN on, is a proposed multifaceted LNG facility that would obtain gas from the Tennessee gas 200 line, that runs across the state, chill the gas for storage in tanks and load gas onto trucks for transport, ultimately supplying national grid customers.

What is important to stress is that this is a growing global market. Much of what you hear about is North American centric as it is very active right now, ranging from small-scale LNG for mining customers in Mexico to power customers in locations, such as the Caribbean and the East and West Coast of the United States. Yet as you can see on the map on Slide 4, this small-scale market is global. In Europe, small-scale LNG facilities are quickly progressing. With the recently opened Gibraltar regasification terminal that enables the country to switch from diesel-fueled power generation to cleaner burning natural gas.

We designed the cryogenic vessels for LNG storage provided vaporizers, loading arm transportation, site construction and startup for that project. The market opportunity for our equipment and process is expected to be greater than $650 million in the next 3 years, not even including the associated repair and service opportunities that tend to come with small-scale plants.

To give you a sense of the current pipeline of opportunity, we are now working in various stages of bidding on 15 potential projects globally, not even including regas terminals, which we'll discuss shortly. Speaking of repair and service, we continued to progress toward our goal of over 20% of our revenue from aftermarket repair and service within 3 years from our current level of 13% of sales.

In the second quarter, we've launched our Chart Parts website where customers can easily find a used tank or place an aftermarket order. The tool has generated $1.2 million of Internet sales for the first half of 2019 compared to last year's full year part sales through the web of $1.8 million.

Let me start on Slide 5 by stating that we continue to expect potential 2019 large LNG-related orders of $600 million to $800 million. Much progress has been made in the second quarter against specific projects that are in our pipeline. This slide has been updated for other big LNG projects that we expect content. And we have removed the small-scale projects that previously were included as we're now talking about them separately. The new projects on this slide are rows 7 through 10, which I will discuss shortly. Before diving into specifics, we have exciting news to share regarding FortisBC's agreement announced yesterday with China's Top Speed Energy Corp. to supply 53,000 tons from its Tilbury facility in British Columbia as of 2021 for 2 years. The Tilbury facility uses IPSMR process technology and Chart equipment.

Starting on row 1 on the chart, not only does Venture Global Calcasieu Pass project, for which we booked $135 million order in March, have all necessary premise to proceed, including FERC authorization and non-FTA export authorization from the Department of Energy. They secured $1.3 billion of Stonepeak equity funding in May and has commenced construction on the 10 million ton per annum project. We're currently working with Baker Hughes, GE under a limited notice to proceed and expect final notice to proceed in the near future. Venture Global has also made significant strides in additional commitments for their Plaquemines 20 million ton per annum export terminal project, which is now included on this slide on row 7.

In the quarter, VG secured 2.5 million tons per annum with PGNiG and raised an incremental $675 million of institutional equity commitments for Plaquemines, a 36 cold box project for us. Tellurian and subsidiaries of Total S.A. entered into definitive agreement last week, agreeing to invest $500 million in Driftwood Holdings and purchase 1 million tons per annum from Driftwood LNG as well as taking 1.5 million tons per annum of offtake LNG volume. Tellurian has indicated that Chinese customers are not critical to getting Driftwood to FID. And phase 1 or 16.6 million ton per annum FID is continued to be expected in the second half of 2019. Cheniere advances Corpus Christi Stage 3 project planned for a 2020 FID with the announcement of their supply side liquefaction agreement with Apache Corporation.

Also meaningfully is Cheniere's recent statement that they are comfortable that Stage 3 is a 2020 event with or without China. We've now included Cheniere's Corpus Christi Stage 4, Golar's Gandria floating LNG project and Freeport LNG Train 4 in rows 8 through 10. We're currently bidding on Corpus Stage 4 for potential brazed aluminum and air-cooled heat exchanger content as well as cold box and core-in Kettle content. Golar's third FLNG vessel, Gandria, will be the same design as the Hilli and Gimi, both of which utilized Chart equipment.

And finally, we supplied Brazed Aluminum Heat Exchangers for the NGP plant on the Freeport trains already in place and currently are bidding on the brazed content for the feed gas pretreatment on Train 4. IPSMR has been chosen for both Driftwood and CCL Stage 3. IPSMR already has undergone technology qualification and has been expected by 2 international oil companies. We're also working directly with one another IOC that is keenly interested in implementing IPSMR at the early stages of their project plans.

The U.S. Patent and Trademark Office recently granted a process patent covering the use of the cold vapor separator in our IPSMR liquefaction process. The cold vapor separator significantly enhances efficiency of Chart's liquefaction technology. This is the fifth U.S. patent in the IPSMR family, covering liquefaction, heavy hydrocarbon removal and end flash gas cold recovery. We also have significant international patent coverage of the technology to complement U.S. coverage. Several other patent applications are currently undergoing examination by the USPTO and foreign patent offices.

So speaking of the international big LNG projects, let's turn to Slide 6. This international build-out of big LNG is another contributor to the global LNG infrastructure opportunities that we participate in. On the left-hand inside of the page are a subset of international liquefaction projects of varying sizes. Most of our equipment content on these projects relates to pretreatment, and we anticipate having content on 14 of the 19 international projects shown.

Also worth noting on the right-hand side of the page is the need for regasification once the export terminals produce. Regas capacity is expected to expand by 55% by 2025 with Asia-Pacific and Europe as a key regions for regasification terminals. These facilities are in our wheelhouse from a D&S and E&C standpoint and revenue varies based on size and content of the facility. For a vaporizer-only project, our content could be in a $15 million to $30 million range.

For multiuse terminals that include regas, marine loading and in-land truck loading capabilities, our content range would be $25 million to $40 million. And for large-scale power regasification, which are multilevel skids that have vaporization packages for direct ship-to-shore power applications, our content can be north of $75 million. We have numerous regas terminals that we are bidding on right now.

Moving to Slide 7 from left to right on the slide, another key aspect of global LNG infrastructure build-out is over-the-road transport. As we announced earlier this year, we executed 2 long-term agreements with key European over-the-road trucking customers for HLNG fueling systems. In May, an official decision was made to grant European patents for our integrated HLNG fuel system. This is important as our customers continue to request innovation to this particular product, which creates further stickiness beyond just LPAs and keeps us as a first mover in LNG fueling systems globally. Specific innovations for the next-generation LNG fuel system include a performance-enhancing design for new higher horsepower natural gas engines and a space-optimized package, which improves driving range by up to 7% in certain applications. As over-the-road LNG transport continues to grow, so do the associated fueling stations. In the first half of 2019, we have received 28 fueling station orders compared to 13 in the first half of last year.

Moving to specialty markets, for which sales increased 24% in the first half of 2019 compared to the first half of 2018, the middle of Slide 7 shows our Chillzilla bulk system, which supplies consistent liquid nitrogen for optimum freezing performance. This quarter, we booked $1.5 million of Chillzilla order for a new food and beverage end customer that makes beef patties for a large fast food operation.

Last quarter, we shared our penetration with large beverage companies on Nitro beverages. This is just another example of the over $500 million market opportunity for our products in food and beverage in the next 3 years.

The third column on Slide 7 shows an example of one of our specialty markets taking hold outside of the United States. In the quarter, we delivered India's largest hydrogen tank which was manufactured in collaboration with the Indian Space Research Organization at our facility in India. Liquid hydrogen is used as a rocket propellant and due to the low temperatures involved, storage projects always pose complex challenges both from a technical and safety perspective. As hydrogen grows globally, we are uniquely positioned to provide large liquid hydrogen tanks for various applications. This is also a good example of specialty markets taking hold outside of the western hemisphere. The combination of specialty market activities with India's LNG infrastructure growth provides us even more opportunity in the region.

Infrastructure build is beginning to be a reality in India as we booked our first order for LCNG bus station in our first order for 5 LNG trailers in the region. We have $20 million of bidding activity currently happening for India, including bids related to our MoU with IOCL that we signed in March. India's Petroleum and Natural Gas Regulatory Board has designated 7 significant companies that are responsible for the city gas distribution in 250 geographic areas. These companies have control over how the gas distribution networks, inclusive of CNG and LNG, are developed and operated within the geographical areas. IOCL has the most with 35 areas.

Last night, we signed a memorandum of understanding with AG&P, another one of the significant companies with responsibility to execute their infrastructure for their city gas requirements in a certain amount of time per their agreement with the Indian government. AG&P is a global industrial infrastructure company with deep expertise in LNG, modularization and field construction. AG&P has multiple LNG initiatives worldwide, including the development and rollout of the following: AG&P's city gas distribution business in India, where they've won long-term exclusive concessions to connect millions of people to compressed natural gas for their vehicles and pipe natural gas directly into their homes across 28 districts; small- and medium-scale LNG import terminals, such as AG&P's pending terminals in Karaikal India that will provide the vital link to bring commercially attractive convenient and safe gas to population centers that today rely on more expensive fuels; LNG applications and logistics, such as LNG delivery to end customers by different transportation options; and finally, additional intellectual property that have made AG&P and its engineering company Gas Entec leaders in the design, build, testing and commissioning of LNG bunkering vessels, floating storage and regasification. As we've mentioned numerous times, these Indian opportunities are the direct result of the addition of VRV to our portfolio. We also have captured synergies in other regions, including Singapore and Malaysia, Sri Lanka and Israel.

Revenue synergies totaled $6 million in our first 6 months of ownership or said differently, we've 9 new customers that neither Chart or VRV could have accessed prior to the combination. In the first quarter of 2019, VRV was at an operating margin loss, as we moved low-margin backlog out to be replaced by higher-margin work. And the team's executed identifying cost synergies. The second quarter 2019 VRV results were operating income and EBITDA positive when adjusted for onetime costs, well on the way to our anticipated 15% plus EBITDA margins expected exiting the fourth quarter of 2019. VRV second quarter orders of $27.8 million were 6.2% higher than the first quarter, resulting in VRV backlog of $85.8 million, an increase of 9% over the first quarter of 2019.

Another benefit of our global footprint is bringing our traditionally North American-manufactured energy products into other regions thereby penetrating markets and customers that previously were off the radar stream due to the economics of shipping from United States. With the completion of the Air-X-Changers' acquisitions as of July 1, we are not only starting to execute on the $20 million of cost synergies, but we're also beginning to leverage our global footprint to bring what traditionally was nearly all North American air coolers to international markets adding revenue synergies. We intend to utilize our Indian and European manufacturing facilities to add a new set of markets and projects that neither our Chart legacy air coolers nor Air-X-Changers played in previously.

We continue to see growing order activity for the newly formed Energy & Chemicals FinFans segment, which is where the Air-X-Changers business will report. Total backlog as of the end of Q2 for FinFans, inclusive of AXC was $223 million, which covers over 80% of our second half 2019 revenue forecast for that segment.

While there's been recent concern over softening compression markets, we are not seeing any significant decline. The Permian basins, where we have our largest presence, is the most active basin in the U.S., largely because the well results are the best economics in the country. We've seen in the last few weeks some declining rig activity in the Permian, although less than other basins. The gas production, which is a byproduct of desired oil production growth, continues to climb as operators increase rig efficiencies. Furthermore, new compression will be needed for the infrastructure to move gas to downstream markets.

There's also recently been consolidation activity in the compression sector, largely focused in the Permian as new entrants have been attracted to the Permian growth story and are looking to capitalize trend toward larger horsepower compression units. We expect these well-capitalized operators will continue to invest more capital into large HP compression units, a sweet spot for Air-X-Changers.

Before we move into our strengthening margin profile, I'll take a few minutes to discuss some other market drivers that are not included in our guidance or 2020 outlook that could have significant upside impacts for us over the next 3 years. These 2 areas are IMO 2020 and LNG By Rail.

Recently, SEA\LNG released a study showing that LNG as a marine fuel delivers the best return on investment. The study highlights key findings, LNG is a better return on investment, the CapEx hurdle is diminishing, it delivers competitive energy cost, has higher environmental performance and is the most financially effective long-term method for complying with the 2020 sulfur cap. All of these trends further support that once enforced, those complying with IMO 2020 may need Chart equipment.

We briefly discussed LNG By Rail on our last earnings call and our unique position with our Gas By Rail offering. May 2020 is the expected date for the completion of the regulatory efforts based on the executive order signed by President Trump. Since the signing of the order, there's been continued interest in our LNG tank cars for transporting LNG by rail as freight for both domestic consumption and export. In addition, there is renewed interest in LNG fuel tenders for dual fuel locomotives. For example, Florida East Coast Railway is the first North American railway to operate its entire fleet of trains on LNG. It has reduced carbon emissions by 25% and sulfur emissions by more than 40% on the Jacksonville to Miami, Florida route. We designed and built Florida East Coast Railway's tender cars to ensure safety and economic benefits for FEC.

Moving to Slide 8 and into the margin discussion. On the top half of the slide, adjusted gross margin as a percent of sales is shown for the second quarter of 2019 compared sequentially to the first quarter, and the bottom of the slide shows the comparison to the second quarter of 2018.

Sequentially, each segment's adjusted gross margin as a percent of sales is up over 125 basis points, with D&S West, up 270 basis points, reflecting the pricing and 80/20 efforts taking hold. Also noteworthy and not to be overshadowed by the improvements in gross margin are the continued reductions in SG&A.

SG&A in the second quarter was $50.3 million or $47.1 million, excluding restructuring and transaction-related costs. This is a sequential decline from first quarter SG&A of $55.3 million or $50.6 million, excluding onetime costs.

To provide details on the pieces of what is driving the bottom line benefits, turn to Slide 9, which recaps our first quarter 2019 restructuring activities. While I won't repeat what we shared with you in April, we included this so that you can build to our year-to-date impacts.

Quickly moving to Slide 10, which shows our second quarter restructuring actions. In the quarter, we had $4.4 million of restructuring cost, which will result in annual benefit in 2020 of $4.2 million and $3 million incremental benefit in the second half of 2019.

The following are the specifics. We completed the consolidation of our La Crosse, Wisconsin office location into our plant. This is shown in a red box because it was previously included in our assumptions. Across all of the segments in corporate, we further took advantage of Chart business services and reduced overlapping headcount in various facilities. Finally and with the most impact was the closure of our LNG vehicle tank line in China. In China, this is a very competitive and fragmented market with numerous changes from the government to the LNG truck-emission standards. Over the course of producing vehicle tanks in China starting in 2013, we've not had a year where we've made money. This product line lost anywhere from $1 million in 2013 to $1.5 million in 2018 on $1.8 million of revenue. We can serve the region from our Italian or U.S. HLNG fuel systems lines. Year-to-date, we have executed restructuring actions that will result in $10.7 million of annualized savings beginning in 2020. In addition to the restructuring, it is also worth noting that against our original $5.5 million of expected annualized sourcing savings, we have, to date, achieved $6.3 million.

Obviously, I was in a mood to use maps in this deck today. And so to keep that trend going, let's slip to Slide 11, where you can see the extent of our global footprint. Out of our 27 locations, 9 have been added since September of 2017, including the key locations from the VRV acquisition. Not only has having regional manufacturing around the world opened new markets and customers to us, it has allowed us to, in conjunction with our 80/20 process, strategically utilize our capacity, both from a lead time perspective as well as from a cost perspective. For example, we've been able to reduce lead times in 27 of our 44 Distribution & Storage product categories since the beginning of this year. We've done this through utilizing various locations to build the core bottles to have on hand, which can be customized in a shorter period of time to customer requirements, hold stock on product that is critical to customers, spread high-demand product between facilities and make products closer to the end customer.

The combination of the margin-expansion activities, the addition of Air-X-Changers and underlying fundamentals of the industry tailwinds contribute to the reiteration of our prior guidance, as shown on Slide 12. Sales for the full year of 2019 are expected to be in a range of $1.41 billion to $1.46 billion with corresponding adjusted earnings per share of $2.85 to $3.20 on approximately 34.7 million weighted average shares outstanding. This excludes any restructuring and transaction-related costs and assumes an effective tax rate of 21%. Our guidance assumes LNG project revenue in 2019 from the Venture Global Calcasieu Pass and Golar Gimi projects, which is subject to project timing. We've included additional impacts from our strategic financing activities in our guidance, as shown on row 8. We had included an initial estimate in our prior guidance from early May when we announced the AXC transaction. The combination of the second quarter beat on EPS and the further restructuring benefits in the second half of the year are expected to offset the additional financing drag. While we've not seen negative impacts to our supply chain from the Chinese tariff situation, we're carefully monitoring any impacts to our orders and sales. In the second quarter, we experienced a few bidding losses in China to local suppliers, which were articulated as driven by the trade tension.

The only other tangible negative from the trade dynamic has been the inability to ship stainless steel cryobiological freezers into China, which had delayed $2 million of sales. These sales will be recognized very quickly after the trade situation is resolved.

I'll now turn it over to Jeff to walk through specifics of the second quarter earnings on Slide 13 and provide information related to over 4 segments second half 2019 expectations.

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Jeffrey R. Lass, Chart Industries, Inc. - VP, CFO , Treasurer & CAO [3]

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Thanks, Jill. The margin expansion activities, Jill described, contributed to our net income for the second quarter of 2019, the $14.4 million, an increase over the first quarter 2019 net income of $0.9 million. Reported earnings per share of $0.41 is an increase over the first quarter 2019 EPS of $0.03.

Slide 13 shows adjusted EPS of $0.68 for the second quarter of 2019, which included $6.7 million of restructuring and transaction-related costs, $0.8 million of VRV-associated interrogation costs and dilution impact from convertible notes that are fully hedged. Second quarter 2019 adjusted EPS of $0.68 is 74% increase over the first quarter adjusted EPS of $0.39 and a 42% increase over the second quarter 2018 adjusted EPS of $0.48, as shown on the last row of the chart.

Slide 14 is a recap of our reiterated guidance that Jill walked you through. In addition to the sales, EPS, tax rate guidance already shared, our capital expenditure guidance remains at $35 million to $40 million of anticipated spend. Year-to-date, we have spent $15.1 million.

Finally, while we do not share our guide at the segment level, the following will give you a sense of the second half 2019 revenue and gross margin ranges by the 4 segments.

We expect E&C FinFans gross margin as a percent of sales to be in the range of 26.5% to 28% on a revenue of $270 million to $285 million. E&C cryo revenue range is anticipated to be at $135 million to $150 million with associated gross margin of 25% to 28%. D&S West revenue range of $245 million to $260 million with expected gross margin as a percent of sales between 35% and 37%. And finally, D&S East gross margin as a percent of sales is expected to be 22% to 23.5% with associated second half revenue of $150 million to $165 million.

I will now turn it over to Daniel to open it up for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from James West with Evercore ISI.

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James Carlyle West, Evercore ISI Institutional Equities, Research Division - Senior MD [2]

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Congrats on another solid deep -- solid quarter. Jill, with all moving parts we've seen over the last 18 months or so, the acquisitions and divestitures, a lot of work on the margin side, where do you think -- if I exclude big LNG, which can be episodic, as you know, where do you think your kind of mid-cycle earnings would shake out at this point? I think it's about $4, but I'm curious to hear your thoughts on that?

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Jillian C. Evanko, Chart Industries, Inc. - CEO, President & Director [3]

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I would agree with your estimate there. And mid-cycle, from our perspective, is looking like on a 7-year cycle type of view. And from our 2020 outlook, we will -- we maintain what we put out in early May that our updated outlook inclusive of big LNG projects is $8 to $8.75 of adjusted EPS in 2020. We also anticipate that 2020 is not the peak in this cycle.

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James Carlyle West, Evercore ISI Institutional Equities, Research Division - Senior MD [4]

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Right. Okay. Great. And then just a follow-up for you on the base -- again on the base business ex the large-scale LNG. Where is that -- what do you think your growth rate is now, just kind of normalized growth rate post all the acquisitions, et cetera?

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Jillian C. Evanko, Chart Industries, Inc. - CEO, President & Director [5]

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We forecast 7% to 9% organic growth still on the base business pre any big LNG. That's our outlook for 2020. And there's a little bit of upside potential to that. But that's really available to us, and we have a good line of sight to achieving that into next year.

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Operator [6]

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Our next question comes from Martin Malloy with Johnson Rice.

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Martin Whittier Malloy, Johnson Rice & Company, L.L.C., Research Division - Director of Research [7]

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Congratulations on the quarter. There's been some news recently about -- in some international markets about mid-scale LNG liquefaction projects in conjunction with bunkering, opportunities related to marine. Can you maybe talk about how you're seeing that market develop and opportunity there for you? It seems like it's a combination of 2 markets that you're well suited for?

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Jillian C. Evanko, Chart Industries, Inc. - CEO, President & Director [8]

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Yes. Absolutely. That is correct. That is an opportunity that's recently been developing. And I think folks mix between small-scale and mid-scale. We tend to call these small-scale and regasification terminals, but that's inclusive also of some of the marine bunkering applications. We are starting to see interest in the utilization of IPSMR process technology for certain terminals overseas. And that's something that also has been leveraged through the work that's been done over the last 3 years with the international oil companies that I referenced with respect to their projects and their development, whether through joint ventures or investment in some of the smaller mid-scale terminals. So we see a lot of opportunity. Those opportunities are included in the small-scale and regasification numbers that I provided on the call today.

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Martin Whittier Malloy, Johnson Rice & Company, L.L.C., Research Division - Director of Research [9]

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Okay. And then on Harsco, you mentioned international markets for growth there. And could you maybe just talk about some of the potential applications that you're seeing for their equipment?

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Jillian C. Evanko, Chart Industries, Inc. - CEO, President & Director [10]

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So this is an area that -- this is first time we're talking about revenue synergies from the AXC acquisition, and there's a huge opportunity for us to take air coolers overseas. It's something that neither we, Chart, did nor Harsco AXC did previously, and that was really a function of the localized manufacturing needed in the region, just not economical to ship these things from anywhere in North America to applications ranging from NGP through petrochemical to other large facility builds. And we're seeing a significant desire for air coolers in the Middle East as well as starting to see that in Southeast Asia in locations such as Thailand, Vietnam, Myanmar. So Southeast Asia and Middle East are really the 2 target geographies.

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Operator [11]

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And our next question comes from Tom Hayes with Northcoast Research.

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Thomas Lloyd Hayes, Northcoast Research Partners, LLC - MD & Senior Research Analyst [12]

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Jill, maybe just kind of on the manufacturing front, as kind of there has been talk about maybe a softening on the manufacturing front globally, have you seen any change in your demand for your industrial gas storage business?

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Jillian C. Evanko, Chart Industries, Inc. - CEO, President & Director [13]

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We've not yet seen any negative impacts on that side of the house. We are monitoring it because it's certainly something that's a macroeconomic factor that could impact us. But I think the other thing to remember is, our markets while tied to industrial gas, also are very broad and have a wide set of applications. So the linkages to some of these industry tailwinds that we talked about today, also help in terms of keeping industrial gas moving forward and as well as the fact that we are on long-term agreements with the major industrial guys, that gives us a little bit better visibility than perhaps the general macroeconomic situation gives. So not yet, but it's something that we are watching.

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Thomas Lloyd Hayes, Northcoast Research Partners, LLC - MD & Senior Research Analyst [14]

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Great. And then maybe as -- on a follow-up, thinking about the longer-term margin profile, do you see that the gap between the gross margin on D&S West and D&S East closing over time?

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Jillian C. Evanko, Chart Industries, Inc. - CEO, President & Director [15]

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We do see that gap closing over time. So D&S West was the frontrunner in our business purposely on the 80/20 actions. We have started 80/20 in D&S East but there's also some just fundamental margin opportunities for us to get quickly out of the D&S East business. We would anticipate that D&S West kind of be at its peak in the high 30%, possibly up to 40% gross margin as a percent of sales, whereas D&S East can inch up toward 30%. We don't see D&S East, just given the China dynamic, ever overlapping where D&S West gross margins are.

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Operator [16]

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And our next question comes from Rob Brown with Lake Street Capital Markets.

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Robert Duncan Brown, Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst [17]

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On the sourcing efforts, you said you're running ahead of plan there. Can you give us an update on where you think that can go? And how much more room you have there?

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Jillian C. Evanko, Chart Industries, Inc. - CEO, President & Director [18]

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We've been extremely pleased with the results of the sourcing activities, and a big part of that is credit to the Chart business service team, inclusive of naming an individual to run the global sourcing project and all the folks around the globe that have participated in the efforts. So I want to make sure that I don't diminish what they've done because that really just hammered away the first half of this year. We see another $5 million of sourcing savings from the core business. And then on top of that, inclusive within our $20 million of AXC is $3 million to $4 million of sourcing.

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Robert Duncan Brown, Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst [19]

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Okay. Great. And then moving to the fueling station, LNG fueling station opportunity. What geographies are you seeing the most growth? And what's the size of that market opportunity in your view at this point?

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Jillian C. Evanko, Chart Industries, Inc. - CEO, President & Director [20]

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So of the 28 in the first half of the year, 10 of those were in China and the other 18 were in Europe. I think Europe by far is our most early days significant grower between the 2 regions. LNG fueling station for us, depending on the size and the construct, ranges between $650,000 and $1.1 million per station. The opportunity there for -- we are quoting like crazy on these fueling stations in Europe. I'm not going to cite a number for you because it's -- I don't want everybody to get out over their skis, but suffice it to say that it is a very active market right now and the infrastructure in Europe build-out is supporting at least that in the second half.

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Operator [21]

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And our next question comes from Eric Stine with Craig-Hallum.

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Eric Andrew Stine, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [22]

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So maybe bigger-picture in E&C. Obviously, with IPSMR and IPSMR+, you're in a good position or very good position this current cycle. But as you think long term, just curious, do you feel like the market fully realized the benefits of that versus other process technologies? And then you've got -- you mentioned the acceptance with the 2 global energy majors. Just aside from -- what that means from an overall market perspective? Should we view that as if those majors have projects? They are committed exclusively to go IPSMR? Or anything you can share there would be helpful?

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Jillian C. Evanko, Chart Industries, Inc. - CEO, President & Director [23]

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Sure. And I do want to just restate what I said on the call that there's a third that's highly interested in working with us as well. So I think that the process is starting to get -- it's starting to get better known in a wider audience. Certainly, the Fortis British Columbia facility and installation of IPSMR is somewhere that we can take future customer to see it working and running. So as it starts to take hold, we are seeing an acceleration of others interested in it. And as you're well aware, there's only a certain number of process technologies in the market. I do think that this bodes well for us in the next 10 years. So just like you're seeing right now, projects that are coming online from 7, 8, 9 years ago, this cycle, I think you'll start to see that happen again in the next cycle, and that will have even more of a foothold for IPSMR.

With respect to the second half of your question around what does that mean with the IOCs, my hands are pretty tied in terms what I can share publicly on our agreements and relationships with those IOCs. But we do work closely when they have a project or when they are invested in a project to move the process technology and get it involved there, but that's the extent of what I can tell you on that.

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Eric Andrew Stine, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [24]

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Okay. Fair enough. Maybe last for me just on the vehicle tank side. I know you've got the 2 agreements in Europe, and you're adding capacity there. I think in the last call or 2, you've mentioned talking to more than a handful in terms of LNG interest, which I guess probably means you're talking to everyone. So I mean just maybe any detail on how that's progressed in the market?

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Jillian C. Evanko, Chart Industries, Inc. - CEO, President & Director [25]

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We haven't seen any meaningful progression with any of the new guys that we're talking to. So it's really been maintained with the 2 that we've long-term agreements with. There's is a third that we do sell some tanks to. What we're seeing now is the folks that we have the long-term agreements with are working very closely with us on that next-gen that I spoke about, and that is ramping next 3-year volumes. So we'll see a significant uptick is our anticipation in 2020 and again in 2021 from those guys. I think it's going to be a slower roll for some of these other regions and/or customers that we're working to penetrate. We've been talking with them for a few years. And it has been evident in -- certainly in the European market is it takes 1 mover and then some of the other folks follow. And I think that's going to be the case in places like India or places like Southeast Asia.

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Operator [26]

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And our next question comes from Pavel Molchanov with Raymond James.

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Pavel S. Molchanov, Raymond James & Associates, Inc., Research Division - Energy Analyst [27]

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I remember in 2013 and '14, PetroChina was a huge customer specifically for those natural gas fueling stations, and that business essentially went away for a period of time. And you're indicating that it's coming back including in China. I'm curious kind of what the dynamic there is that led to the revival of something that seems to have disappeared?

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Jillian C. Evanko, Chart Industries, Inc. - CEO, President & Director [28]

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Well, it's certainly not coming back to any level close to 2013 or 2014. So I'll be perfectly crystal clear on that. 10 stations in the first half of the year is an increase over the last year, and that's a good sign. But we're talking about increasing of 10% versus what we saw in 2013, 2014 of 30%. So we don't forecast, nor do we expect anything higher than kind of that 10% to 12% going forward.

And with respect to the second piece of your question, we are seeing a little bit of movement in the market and that's really what's been happening over the last 5 to 7 years of when the government's pushing for certain regulations and certain requirements then you see the market move that way. But it's not been nor will it be close to what it was back in the boom time of '13 or '14.

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Pavel S. Molchanov, Raymond James & Associates, Inc., Research Division - Energy Analyst [29]

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Okay. Next, balance sheet, with the equity raise from a month ago, are you essentially where you want to be in terms of your leverage metrics?

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Jeffrey R. Lass, Chart Industries, Inc. - VP, CFO , Treasurer & CAO [30]

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Yes. I think post closure of the Harsco deal, right out of the, we're at 3.3, which is a little north of our stated range of 2 to 3x. But we've got visibility that to delevering against that very quickly. And I think that would now continue to be the way that we think about the business. We want to work with a strong balance sheet and give ourselves the ability to take advantage of opportunities that are in the market from time to time. So yes. I think we're where we want to be.

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Operator [31]

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And our next question comes from Craig Shere with Tuohy Brothers.

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Craig Kenneth Shere, Tuohy Brothers Investment Research, Inc. - Director of Research [32]

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Congratulations on a great quarter again. Look forward to seeing in 2, 3 weeks here. I'm just trying to understand the 7% and 9% organic growth before big LNG. Because it seems like there's a little disconnect between that and some of the stair step opportunities and small-scale LNG, maritime fuel, over-the-road opportunities, food and beverage. Maybe you could elaborate on how much of a very doable target that is? And how much we could exceed it if some of these other opportunities really manifest as you've been kind of generally describing they could?

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Jillian C. Evanko, Chart Industries, Inc. - CEO, President & Director [33]

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Are you calling me a sandbagger?

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Craig Kenneth Shere, Tuohy Brothers Investment Research, Inc. - Director of Research [34]

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Just my guess as to what the potential upside might be.

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Jillian C. Evanko, Chart Industries, Inc. - CEO, President & Director [35]

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Yes. So hopefully all of you have been around us for a period of time now understand that we like to guide to something that we have a high level of confidence in, and that's what we've done again in this 2020 outlook. So to your point, Craig, there is upside to that certainly in the base business as well as the specialty markets business. What we are waiting on in terms of increasing that any further is with respect to the timing around the new HLNG design for the vehicle tank that we talked about today. So that could be a significant lever for us. We do have a good line of sight on potential hydrogen projects that would increase this as well and probably the other one I would talk to you is around the fueling stations that there is high potential for more than what we've included here. And then later on, IMO and LNG By Rail, you could be in a 11% to 13% growth very quickly here. But the 7% to 9%, we have tangibly actions and order books and order bidding activity that give us high level of confidence in that forecast.

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Craig Kenneth Shere, Tuohy Brothers Investment Research, Inc. - Director of Research [36]

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Is it fair to say that low double-digit growth could be a multiyear phenomenon?

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Jillian C. Evanko, Chart Industries, Inc. - CEO, President & Director [37]

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Yes.

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Craig Kenneth Shere, Tuohy Brothers Investment Research, Inc. - Director of Research [38]

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And one last question here kind of following up on Pavel's balance sheet query. Your -- given your low CapEx or ramping free cash flow, you're looking at material organic deleveraging as time goes on here. Our -- assuming there's no more real big ticket M&A, at some point probably, you're going to be in the fortuitous position of having a 2.5x leverage and still very robust free cash flow. What do you think about -- as you envision a couple of years out, could you see potentially looking at share buybacks?

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Jeffrey R. Lass, Chart Industries, Inc. - VP, CFO , Treasurer & CAO [39]

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Yes. I would say we've articulated our priorities for free cash flow as continue to invest in growth and productivity in the business. And from a CapEx perspective, we've sort of given you that guidance. And certainly in the near-term, we're going to focus on deleveraging the business. But to your point, we should be able to achieve that relatively quickly and the business ought to continue to generate very healthy free cash flows beyond that. But as we sort of survey the field and continue to think about our potential growth initiatives, we have an active M&A pipeline that we evaluate. We still see opportunities in the marketplace, and we will prioritize that at this point in time. Down the road, never rule anything out, but those are our priorities that we've stated and I think we're going to stick to those for the foreseeable future.

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Operator [40]

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And our next question comes from John Sturges with Oppenheimer & Co.

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John S. Sturges, Oppenheimer & Co. Inc. - Director of Investments [41]

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Impressive margin improvements for the quarter, so congrats on that. I have 2 questions. They are mostly top-down policy. One is recent regulation reductions in the U.S., does that have -- has had any impact on margin improvement? Or is that mostly internally generated? And the second one is -- has to do with U.S. tariff policy to reduce global tariffs. I am curious as to how that may impact U.S. versus your global manufacturing sites in terms of where you might have to ship production?

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Jillian C. Evanko, Chart Industries, Inc. - CEO, President & Director [42]

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So the margin expansion is nearly whole from internal activities to the first half of your question. To the second half of your question, we are uniquely positioned and very pleased with the position of having the options to decide where we make what we have a lot of flexibility in our lines in terms of being able to produce in the various different geographic locations, and that is something that we constantly are looking at based on the economic and the trade situations that are happening. So we will take advantage of having the opportunity to manufacture closer to our customers and also think through the impact from any tariffs on our products.

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Operator [43]

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If there're no more questions, I will now turn the call back over to Jill Evanko for some concluding remarks.

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Jillian C. Evanko, Chart Industries, Inc. - CEO, President & Director [44]

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Thanks, Daniel. As you heard today, our unique position in serving the liquefaction, storage and transport for global LNG infrastructure provides a strong and varied order book ahead. We continue to be bullish on our big LNG opportunities. And while we are carefully watching the macroeconomic industrial and China trade war situation, we are pleased to reiterate our 2019 full year guidance. I want to thank our team members for executing the quarter results, continuing to drive order opportunities and completing the Air-X-Changers' acquisition. Last, but certainly not least, an official warm Chart welcome to the Air-X-Changers' team. Thank you all for your time today and goodbye.

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Operator [45]

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Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone, have a wonderful day.